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02/12/2015

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We  offer cloud-based accounting solutions.  Using good technology saves time.  With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button software can make a real difference to the way you run your business.

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... a digital firm using the best tech to help our clients

Welcome to Adrian Mooy & Co Ltd

like yours grow and be more profitable.

We offer a personal service and welcome new clients.

We are a firm of Chartered Certified Accountants

and tax advisors in Derby helping businesses

From start-up to exit & everything in-between.

Whether you’re struggling with company formation,

Adrian Mooy & Co - Accountants Derby

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Services

We offer a range of high quality services

Web-based accounting

Xero is a web-based accounting system designed with the needs of small business owners in mind.

 

It can automatically connect to your bank and download your bank statements. From there it’s simple to tell Xero what transactions relate to and once told it remembers and looks out for similar transactions. This saves time and makes keeping your accounts up to date easier.

 

Log in from any web browser. As your accountant we can log in and provide help.

 

Making Tax Digital - VAT

Our process for delivering tax accounting vat self assessment and payroll services

 

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Our Process

Understand your needs

Firstly we listen and gain an understanding of your business and what you are aiming to achieve.

Continuous improvement

We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.

Build a relationship

Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.

Confirm your expectations

Our aim is  to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.

Actively communicate

Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.

Our Process

Understand your needs

Confirm your expectations

Actively communicate

Build a relationship

Continuous improvement

Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time.    Eddie Morris

Call us on 01332 202660

Testimonials

First class! Super accountant! We have been with Adrian Mooy & Co since 1994. They provide a prompt, accurate & reliable service. There is always someone at the end of the phone to help and advise us. They have always delivered and we are more than happy to recommend them.    Ian Cannon

Helpsheets

  • NL Wage and NM Wage changes from April 2021

    Under the minimum wage legislation, workers must be paid at least the statutory minimum wage for their age. There are two types of minimum wage – the National Living Wage (NLW) and the National Minimum Wage (NMW). From 1 April 2021, as well as the usual annual increases, the age threshold for the National Living Wage is reduced.

    National Living Wage - The NLW is a higher statutory minimum wage payable to workers whose age is above NLW age threshold. Prior to 1 April 2021, it was payable to workers age 25 and above. From 1 April 2021, the NLW age threshold is reduced; from that date it must be paid to workers aged 23 and above.

    National Minimum Wage - The NMW is payable to workers who are below the age of entitlement to the NLW. Prior to 1 April 2021, the NMW applied to workers above compulsory school leaving age and under the age of 25; from 1 April 2021, the NMW must be paid to workers under the age of 23 and over the school leaving age.

    There are three NMW age bands:

    Workers aged 21 and 22 (prior to 1 April 2021, workers aged 21 to 24).

    Workers aged 18 to 20.

    Workers aged 16 and 17.

    Apprentices - There is also a separate NMW rate for apprentices. It is payable to apprentices under the age of 19 and also to those who are over the age of 19 and in the first year of their apprenticeship.

    Accommodation offset - Employers who provide their workers with accommodation are able to pay a lower minimum wage to allow for the cost of the accommodation provided. The amount that you are obliged to pay is found by deducting the ‘accommodation offset’ from the appropriate minimum wage for the worker’s age. The daily accommodation offset rate can be deducted for each full day for which accommodation is provided. For these purposes, a day runs from midnight to midnight. The weekly accommodation offset rate is seven times the daily rate.

    Rates from 1 April 2021

    NLW: Workers aged 23 and above £8.91 per hour

    NMW: Workers aged 21 and 22 £8.36 per hour

    NMW: Workers aged 18 to 20 £6.56 per hour

    NMW: Workers aged 16 and 17 £4.62 per hour

    NMW: Apprentice rate £4.30 per hour

    Accommodation offset £8.36 per day £58.52 per week

    Check you are paying the correct rates

    Employers should ensure that the amounts that they pay workers on the NLW or NMW from 1 April 2021 are in line with the new rates. They should also ensure that they have processes in place to identify when a worker moves into a new age bracket. From 1 April 2021, this will include workers aged 23 and 24 who will be entitled to the NLW from that date.

  • Can you claim SEISS 4th & 5th payouts during 2021?

    If you commenced self-employment after 5th April 2019

    If you started your self-employment after 5 April 2019, you were denied support under this scheme from the first three quarterly payouts to 31 January 2021.

    The good news is that due to lobbying by tax professionals and self-employed support groups the SEISS is being opened to traders who commenced after 5 April 2019. However, there is an additional hurdle to jump before you can make a claim; your tax return for 2019-20 needs to have been filed by midnight 2 March 2021.

    Additionally, your business must be adversely affected by the pandemic and your profits from self-employment must be at least 50% of your income and less than £50,000.

    If you commenced self-employment on or before 5th April 2019

    If you qualified for the first three grants, you should qualify for the further grants due this year unless your circumstances have changed, for example, if you are no longer adversely affected by COVID disruption.

    For those of you who may be claiming for the first time, you will need to claim using your online tax account. HMRC should advise you when the claims process is open for business.

    If claiming the fourth grant – 1 February 2021 to 30 April 2021

    The fourth grant under the scheme covers February to April 2021. It is worth three months’ average profits capped at £7,500 and can be claimed from late April.

    If claiming the fifth and final grant – 1 May 2021 to 30 September 2021

    The fifth and final grant covers the period from May to September 2021. The amount of the grant will depend on the impact that Covid-19 disruption has had on your profits.

    • If your turnover has fallen by 30% or more because of Covid-19, you will be able to claim agrant equal to 80% of your average profits for three months, capped at £7,500.
    • However, if your turnover has dropped by less than 30%, you will be entitled to a reducedgrant of 30% of three months’ average profits, capped at £2,850.

    The final grant can be claimed from late July.

    There is a potential misfit in this fifth grant. Although it covers a five-month period (May – September 2021) the actual payout for this period is based on three months. What about the other two months?

  • How to persuade HMRC a mistake wasn’t deliberate

    HMRC claimed that a taxpayer had deliberately made errors on his tax return. The taxpayer disputed this and took his argument to the First-tier Tribunal (FTT). Why did he think this was worth the effort and what did the FTT decide?

    Making mistakes

    HMRC categorises mistakes in tax returns and other documents as innocent, careless or deliberate. If in the deliberate category and they result in too little tax being paid, the rules allow HMRC to hike the penalties. The level of extra penalties and the chance to reduce them persuaded Mr Issa (I) to challenge HMRC’s view at a First-tier Tribunal (FTT).

    The case

    I made errors on his tax return. This resulted in him underpaying tax by more than £60,000. He hadn’t included pay from his employer when made redundant, and he didn’t mention that a loan from his employer had been written off. His argument was that he’d followed HMRC guidance because he had used figures from his P45 and P60 on his tax return. Plus, he didn’t know the loan write off counted as taxable income. When he completed his tax return he hadn’t realised that his employer had failed to send him a P60 or P11D covering all the earnings and the benefit in kind (the written-off loan). HMRC decided these errors were deliberate errors so in addition to the tax it demanded a penalty of nearly £25,000. Tip. You’re not expected to be a tax expert but you should realise if a matter is complex or unusual, such as redundancy or property sales. You must take “reasonable care” in deciding what figures to put on your tax return. If you’re not sure, take extra steps to get it right, e.g. consult HMRC’s guidance or a tax advisor.

    Two strikes

    HMRC said it had challenged one of I’s tax returns before when he had not declared a benefit in kind and charged a penalty for a careless rather than a deliberate error . Because of this HMRC argued that this time I should have known the additional amounts needed to go on his tax return or at least investigated the matter further.

    Deliberate errors

    There’s a lot at stake if HMRC alleges deliberate behaviour; remember the burden of proof is on it to show it and not you to disprove it. A deliberate error is when someone knowingly provides a document containing an error, intending HMRC to rely on it as accurate, or they consciously choose not to find out the proper tax treatment. Trap.  HMRC can go back up to 20 years to collect tax (plus interest and penalties) if an error was deliberate. If the error is careless, it can only go back six years. Plus, for deliberate errors, penalties start at 35% of the underpaid tax and can be up to 70%. Where the error is concealed from HMRC, the minimum penalty is 50% and the maximum is 100%.

    Persuading HMRC

    The FTT decided in favour of I. It wasn’t satisfied that HMRC had shown he intended to mislead or that it was reasonable that he should have taken additional advice. His past errors did not prejudice the more recent ones.

    Tip. It’s always a good idea to consider how your behaviour might look to HMRC. Check that the information you use to complete your tax return is reliable, and it’s the sort HMRC would expect you to use. Make sure you can show a genuine attempt to follow HMRC guidance. As a minimum, read basic HMRC guidance on filling in tax returns. If you follow these steps HMRC will find it hard to argue any mistake you make is deliberate.

    The FTT ruled for the taxpayer so HMRC must reduce the penalties. If HMRC argues you’ve made a deliberate mistake, set out the steps you have taken to get things right. Show how any errors are accidental and that there was no intention to hide anything.

  • Relief for losses in the early years of a trade

    It is not uncommon to realise a loss in the early years of a trade. However, traders who commenced their self-employment in 2019 or 2020 may also have suffered as a result of the pandemic. Although the Self-Employment Income Support Scheme (SEISS) provided help for traders who also suffered from the impact of the pandemic, those who started trading in 2019/20 were unable to benefit from the first three grants (qualifying only for grants 4 and 5 if they had filed their 2019/20 tax return by 2 March 2021 and met the other eligibility criteria). Traders who started a business in 2020/21 are not able to benefit from the SEISS.

    However, they may be able to claim loss relief under the early trade losses relief rules, and generate a tax repayment in the process.

    Nature of the relief

    The relief for losses in the early years of the trade allows a trader who makes a trading loss in any of the first four years of a new trade to carry that loss back against taxable income of the previous three years. The loss is set against the income of the earliest year first.

    Accruals basis not cash basis

    Relief for the loss under these rules is only available where the accounts are prepared on the accruals basis. Thus, if losses in the early years are likely, it is worth considering preparing accounts using the accruals basis to open up a claim to relief. This relief is not available where accounts are prepared under the cash basis –  where this is the case, the loss can be carried back against any previous trading profits of the same trade, should they exist, or carried forward and set against future profits of the same trade.

    Case study

    Polly was employed as a beautician earning £25,000 a year prior to setting up her own beauty business on 1 June 2020. Her business was badly affected by the pandemic, and in the 10 months to 5 April 2021, she makes a loss of £10,000. This is a loss for the 2020/21 tax year.

    She can carry the loss in her first year back against her income of 2017/18, 2018/19 and 2019/20, setting the loss against her income for 2017/18 first.

    She carries the loss back to 2017/18, setting it against her employment income for that year of £25,000, reducing her taxable income to £15,000 in the process. Carrying the loss back generates a tax repayment of £2,000 (£10,000 @ 20%).

    Personal allowances may be lost

    It should be noted that the loss carried back cannot be tailored to preserve personal allowances, which may be lost as a result.

  • Is rent-a-room relief always worthwhile?

    Rent-a-room relief aims to encourage those with spare rooms in their homes to let them out to increase the supply of furnished rental accommodation. Under the scheme, a person can earn up to £7,500 each tax year tax-free from letting out furnished accommodation in their own home. The limit is halved where the income is shared by two or more people, each person being able to earn £3,750 tax-free a year.

    Automatic exemption

    Where rental income is less than the rent-a-room limit of £7,500 (or £3,750 where income is shared), the tax exemption is automatic. There is no need to tell HMRC about the rental income, or claim the relief.

    Rental income of more than the tax-free limit

    If the rental income that a taxpayer receives from letting a room in their house exceeds the rent-a-room limit of £7,500 (or £3,750 where income is shared), the taxpayer has the option of claiming rent-a-room relief or working out the associated rental profit in the usual way. Where rent-a-room relief is claimed, the taxpayer simply deducts the rent-a-room tax-free limit from their rental income to arrive at their taxable rental profit.

    Where rental profit exceeds the tax-free rent-a-room limit, the taxpayer must complete a self-assessment tax return. If the relief is to be claimed, the claim can be made in the tax return. Whether a claim is worthwhile or not will depend on whether actual expenses are more than the rent-a-room tax-free limit.

    Example

    Maisie lives alone and lets out a furnished room in her home, receiving rental income of £10,000 for the tax year. Her associated expenses are £2,000. If she claims rent-a-room relief, she will pay tax on rental profits of £2,500 (£10,000 - £7,500). However, if she does not claim the relief, she will pay tax on the excess of her rental income over her actual expenses, a taxable rental profit of £8,000 (£10,000 - £2,000). Opting into the scheme is clearly beneficial as this reduces her taxable rental profits by £5,500. If Maisie is a higher rate taxpayer, this will save her tax of £2,200 (£5,500 @ 40%).

    Mathew also lives alone renting out a furnished room in his home. His rental income is also £10,000, but his associated expenses are £9,000. In Matthew’s case, opting into the rent-a-room scheme is not beneficial as doing so will increase his taxable profit from £1,000 (£10,000 - £9,000) to £2,500 (£10,000 - £7,500).

    Preserving losses

    The rent-a-room scheme cannot be used to create a loss, and where actual expenses exceed rental income, it will generally be better not to opt into the scheme in order to preserve the loss so that it can be carried forward and set against future rental profits. However, if the likelihood of being able to use the loss is small, it may be preferable to take advantage of the rent-a-room exemption to save work.

    Example

    Maud lets a furnished room in her own home, receiving rental income of £3,000. The associated expenses are £4,000. If she chooses to use the rent-a-room scheme (which may be attractive due its simplicity) she does not need to report the income to HMRC. However, if she wishes to preserve the loss of £1,000 (£3,000 - £4,000), she will need to complete the property pages of the self-assessment tax return.

    No one size fits all

    The extent to which it is beneficial to claim rent-a-room relief will depend on personal circumstances.

  • EIS or VCT - which is right for you?

    You’ve come into some money and want to invest in a tax-advantaged scheme, either an enterprise investment scheme (EIS) or a venture capital trust (VCT). The tax breaks for these are similar but with important differences. What are they?

    Riskier investments

    Investing in companies always carries a risk and in enterprise investment scheme (EIS) companies or venture capital trusts (VCT) even more so. If you’re new to these types of investment or are unsure about putting money into higher risk schemes, we recommend that before you take the plunge you speak to a financial advisor. It’s worth comparing the different tax breaks for EISs and VCTs as they might help you decide where to put your money.

    Income tax relief

    Both EISs and VCTs offer the same rate of income tax relief which is given in the same way. The tax relief is equal to 30% of the amount you invest (this can be proportionately reduced if the company or fund you invest in uses some of the money for a non-qualifying purpose). The tax relief is given as a reduction of your tax bill. This means it doesn’t matter what rate of income tax you pay the amount of tax relief you’ll get is the same. For example, if you invest £20,000 in an EIS or VCT your tax bill is reduced by £6,000 (£20,000 x 30%).

    The main differences in EIS and VCT income tax relief are:

    you can carry back EIS tax relief from the year of investment to the previous one. Among other advantages this accelerates the tax saving

    the tax relief is clawed back if you sell or transfer an EIS investment (unless it’s to your spouse or civil partner) within three years of making it. The claw-back period is five years for VCTs

    dividends (distributions of income) from VCTs are tax exempt but those from EIS companies aren’t; they are taxable under the normal rules for dividends.

    Capital gains tax deferral

    If you have a capital gains tax (CGT) bill for the year of investment, or the year before, EIS investments offer an incentive VCTs don’t. You can claim deferral of the capital gain until you sell or transfer (to someone other than your spouse or civil partner) the investment. For example, if you made a taxable capital gain in 2020/21, you could defer when it’s taxed by investing in an EIS company on or before 5 April 2022 and using the carry-back rule we mentioned earlier to claim the tax relief for 2020/21.

    Investment gains and losses

    If you sell an EIS or VCT investment for more than you paid for it the gain is tax exempt. For EIS, you must own the investment for at least three years before the exemption applies. If you make a loss from the sale of an EIS investment you can use it to reduce the taxable gains made from other sales or transfers of the same or later years, e.g. from selling an investment property. Conversely, you cannot claim tax relief for losses made from the sale or transfer of a VCT investment.

    As a rule of thumb, EIS investments tend to be riskier than those in VCTs but successful EIS investments usually produce greater income or gains. However, there’s no certainty of success.

    Take your pick . EIS investments have the added incentive of CGT deferral relief. However, if you’re looking for a tax-free income stream VCTs provide it whereas EISs don’t.

    While the rate of income tax relief is the same, EIS relief can also be used to reduce your tax bill for the year of investment or the previous year. EIS investments also allow you to indefinitely defer capital gains tax liabilities. All income and capital gains from VCT investments are tax exempt whereas income from EIS investments is taxable.

  • Double check your P11Ds while there’s time

    Many employers made unusual or special payments to employees because of homeworking or other coronavirus-related reasons during 2020/21. The question is, should they be reported on Form P11D?

    Deadlines and form - The deadline for submitting benefits and expenses returns for 2020/21, Form P11D , is 6 July 2021. Whether you still have this arduous task to complete or have submitted your forms it’s worth sparing a few minutes to make sure that any out-of-the-normal expenses payments related to the pandemic have been dealt with correctly.

    Tip. If you’ve already submitted your P11Ds and need to correct one or more of them, it’s best to do this before the deadline but can be done later if necessary. You must include all the benefits and expenses, not just the ones you want to change.

    Reportable or not - Coronavirus-related expenses paid to your employees or benefits you provided them with in 2020/21 might be exempt from income tax and NI and therefore not reportable on Form P11D . For example, you provided a normally office-based employee with a mobile phone so they could make business calls when they worked from home. Other expenses and benefits are reportable but the employees might be entitled to claim a tax deduction; that’s entirely up to them.

    Non-reportable benefits and expenses - The following benefits and expenses do not need to be reported:

    • a mobile phone that you contracted and paid for and provided for business or private use
    • the cost of a broadband service if the employee did not already have a private contract for it, and it was needed for homeworking
    • equipment, e.g. a computer, provided for business use (even if there is some private use)
    • reimbursing an employee the cost of office equipment they bought because they were required to work from home because of the pandemic
    • payment or reimbursement of the cost of coronavirus antigen tests
    • providing or reimbursing an employee the cost of personal protective equipment needed for their job
    • payment of up to £6 per week towards extra household costs where you agreed with the employee they could work from home.

    Reportable benefits and expenses - The following do need to be reported:

    • a payment which is in excess of £6 per week towards extra household costs where you agreed the employee could work from home
    • payment for accommodation, e.g. a hotel, where an employee self-isolated away from home
    • providing transport for an employee to travel between their home and their normal workplace (unless their home has also become a normal workplace)
    • accommodation expenses if an employee was unable to return home after a business trip.

    More information. The lists above aren’t exhaustive. If you provided a benefit or paid expenses to an employee because of the pandemic and aren’t sure if you should be reporting them on Form P11D HMRC has a couple of guides that might help.

    Not all benefits provided and expenses paid by employers because of the pandemic are tax exempt, e.g. home broadband costs where an employee already had a broadband service. These must be reported on Form P11D. Most benefits and expenses linked to homeworking, e.g. the provision of equipment, don’t need to be reported.

  • HMRC challenges taxpayer’s employment claim

    In a 2021 First-tier Tribunal (FTT) case, the taxpayer disputed HMRC’s assertion that he was self-employed rather than an employee. What key point can businesses take from the FTT’s ruling?

    Bucking the employment trend

    At a time when HMRC frequently challenges claims by individuals that work they do for their clients is on a self-employed basis, the case of Phillips v HMRC 2021 (P v HMRC) bucks this trend. HMRC had formally determined P’s employment status as a freelancer for work he did for City & General Direct (C&G) between 2010 and 2013 and not as an employee. P disagreed and appealed to the First-tier Tribunal (FTT).

    Background

    P had been involved in the development of a medical negligence insurance product which C&G marketed. The company needed P’s expertise in the insurance sector and engaged his services following negotiations through a series of communications, mainly by email. There was considerable discussion between P and C&G about the terms of his working arrangement, and some draft contracts were drawn up. These might have helped P’s case but the contracts were never signed.

    Working conditions

    Eventually it was agreed that P would be paid on a commission-only basis with no salary entitlement. The lack of a regular salary does not alone prove that P was not an employee. The FTT also considered where P’s normal place of work was; this was at his home, in the Lloyd’s building in London or at the offices of various insurance companies he was negotiating with. He had no desk at C&G. However, it did provide him with a computer, other IT equipment and business cards describing him as “sales director”. He also had use of a company credit card. It’s worth noting that HMRC usually cites these factors as good indicators of employment but in practice they don’t carry much weight when compared with matters of control and supervision.

    No control or supervision

    C&G did not control when or how P worked. Neither did it set protocols to review his work or obtain progress reports, although the latter were provided by P at irregular intervals. The lack of control and supervision over P’s work combined with other less significant factors, e.g. C&G did not enrol P in the pension scheme or give him holiday pay, were enough for the FTT to confirm HMRC’s decision of P’s self-employed status .

    Lessons for would-be employers

    While ultimately this case was about the worker’s tax and NI position, had the decision gone the other way it might, in theory, have led HMRC to issue demands for unpaid PAYE tax and NI to C&G. In practice, this would have been unlikely because the time limit for issuing such demands had passed. However, it’s a warning for businesses that use freelance workers to nail down their employment status from the start.

    If there’s the slightest doubt about a worker’s employment status , use HMRC’s check employment status for tax (CEST) tool. Keep a record of the result and all the paperwork to back up the data you input.

    Despite some factors pointing towards employment, the lack of control and supervision over the taxpayer’s work trumped these. The FTT therefore ruled that the taxpayer’s status was self-employed. Use HMRC’s status tool if there’s any doubt over the status of someone who works for you. Keep a copy of the results and supporting documents.

  • Tax deductions for your buy-to-let property

    In between tenants you’re doing some work on your rental property. How you categorise this - repairs or improvements - determines whether or not you’re entitled to an income tax deduction. What factors should you take into account?

    Changing rules

    In the last decade landlords of residential properties have had to cope with more changes to the tax rules than any other group. The changes have affected the tax treatment of income and outgoings. In this article we will take a close look at repair and improvement costs.

    Room for improvement or just repair?

    As a general rule, a “revenue” tax deduction can’t be claimed for the cost of improving your property. A revenue deduction reduces the amount of rental income liable to tax. Instead, the cost is “capital” and so deductible when working out the capital gain or loss you make when you sell the property. You might therefore have to wait decades for a tax deduction.

    Conversely, the cost of repairing a property is a revenue expense and so reduces the income tax bill on rent for the year of expenditure. Naturally, it’s in your interest to attribute a cost to repairs rather than improvements.

    Grey areas

    Sometimes the distinction between a repair and an improvement isn’t clear and the tax legislation doesn’t provide any help. For example, if you add a conservatory to your rental property it’s an improvement cost.

    But what if you completely replace an existing conservatory that had become dilapidated?

    As a rule, an addition to a property, e.g. creating a new room by converting a loft or garage, will always be an improvement.

    Partial or total repair?

    The replacement of an entire element of a property may be a repair or an improvement. The scale and cost of works aren’t usually a factor. For example, the roof of your property was lost in a storm and replaced with equivalent materials; that would be a repair despite improving the value of the property. At one time HMRC usually argued that a repair that significantly affected the value of a property should be treated as an improvement (and so a capital expense) for tax purposes. These days its approach has softened.

    As a rule of thumb, a like-for-like repair or replacement using similar materials to the original counts as a repair regardless of the scale. HMRC’s property income manual (PIM) confirms this. There’s an exception for such expenditure where the repair work is carried out on a property soon after purchase and the cost of the repairs was reflected in the price paid for the property.

    Property fixtures

    Repairing or replacing equipment which is fixed to the property and has effectively become part of the structure, e.g. a heating system including a boiler, is treated in the same way as the structure. For example, a like-for-like replacement boiler and radiators is a repair and the cost qualifies for a revenue deduction . However, if the work included the addition of an extra radiator, the corresponding proportion of the cost would be capital.

    Where possible you should categorise works as repairs. As a rule of thumb, a like-for-like repair or replacement using similar materials to the original counts as a repair regardless of the scale. This applies to the structure of the building and to equipment fitted to it such as boilers and water systems.

  • A tax-saving tip for incorporating your business

    Incorporating your business

    Despite anti-avoidance measures sole traders and partnerships can save tax and NI by transferring their businesses to a company. An unincorporated business that’s transferred to a company is treated as if it permanently ceased. This means that special tax rules for calculating taxable profits apply. One of these says that the equipment owned by the business is treated as if it were sold at market value and acquired by the company at the same price. This usually results in adjustments to the tax deductions, i.e. capital allowances (CAs) previously claimed by the old business. The hassle of valuing equipment and making adjustments to CAs can be avoided if the sole trader/partnership and the company jointly elect to treat the equipment as sold and acquired at the tax value instead of the market value.

    Example.  Josh and Ali are the partners of a delivery business. It prepares its annual accounts to 30 April. In February 2021 the partnership bought three new vans costing £90,000 in total. On 1 May 2021 they transferred the business to Acom Ltd, wholly owned by Josh and Ali. Usually, it could claim CAs for the whole £90,000 (using its annual investment allowance), but the rules don’t allow businesses to use the AIA in their final accounting period. The CAs are limited to the difference between £90,000 and the market value of the vans on the date the business is transferred, zero if the election mentioned earlier is made.

    Another special rule applies when a business is incorporated. It says that a business is not entitled to the AIA on assets transferred to it. This means Acom can’t claim CAs for the whole £90,000 expenditure on the vans all at once. Instead, it gets a CAs “writing down allowance”. This spreads the tax deduction over many years.

    Spreading capital allowances

    In our example Acom is only entitled to CAs at the rate of 18% pa of the reducing balance of the cost/value transferred from the partnership. In summary, because the purchase of the vans occurred in the final trading period of the unincorporated business, Josh and Ali miss out on CAs of up to £90,000 which instead is received by Acom but spread over more than 20 years.

    Josh and Ali can prevent the loss/delay of CAs by changing their accounting period so that the end date falls between when they bought the vans (February 2021) and the date they transferred the business (1 May 2021).

    Example.  The partnership changes its accounting period so that its penultimate accounts run from 1 May 2020 to 31 March 2021. The final accounts cover 1 April to 30 April 2021. The purchase of the vans therefore falls in the partnership’s penultimate accounting period meaning that it gets CAs on the full £90,000. Josh, Ali and Acom also elect to use the tax value which is zero (£90,000 expenditure less £90,000 CAs received by the unincorporated business), for the transfer of the vans to Acom. For relatively little effort the CAs trap, which substantially delays tax relief for the vans, has been avoided.

    As far as possible avoid buying equipment in the final accounting period before the business is incorporated. If that’s not possible change the accounting date so that the expenditure falls into the penultimate accounting period rather than the final one.

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  • Claim tax relief for additional costs of working from home

    During the Covid-19 pandemic, the advice was ‘work from home if you can’. As a result, millions of employees found themselves working at home, often at very short notice. Many still have not returned to the workplace, and homeworking (whether fully or flexibly) is here to stay.

    Employees will generally incur additional costs as a result of working from home. They will use more electricity to run their computer and light their workspace and may use more gas as a result of having the heating on during the day.

    While for many years there has been a statutory exemption that allows employers to meet or contribute towards the additional costs of working from home, in recognition of the homeworking requirements imposed by the pandemic, employees who do not receive homeworking payments from their employer are able to claim tax relief for the extra household costs that they have incurred while working from home.

    Exemption for costs met by the employer

    Employers can pay employees a homeworking allowance of £6 per week (£26 per month) tax-free, and without the employee having to demonstrate that they have actually incurred additional household costs of at least this amount as a result of working from home. The tax-free amount is the same, regardless of whether the employee is required to work from home full-time or one day a week. Consequently, the payments can be made to employees who work flexibly, working from home part of the time and at the employer’s workplace part of the time.

    Where the employee’s actual additional household costs as a result of working from home are more than £6 per week, the employer can meet the actual costs tax-free, as long as the employee is able to provide evidence in support of the actual additional costs.

    Tax relief for employees

    Employees who have been required to work from home can claim tax relief for the additional costs of doing so where these are not met by the employer. HMRC will accept claims of £6 per week/£26 per month without needing evidence of the actual additional costs. Where these are higher, the higher amount can be claimed, as long as this can be substantiated.

    HMRC are now accepting claims for 2021/22. Claims can be made online at www.tax.service.gov.uk/claim-tax-relief-expenses/only-claiming-working-from-home-tax-relief?_ga=2.193253997.1398232652.1624373729-980780301.1612354164.

    Relief is given for the full tax year, even if the employee returns to the workplace before 5 April 2022. Employees who were entitled to the relief for 2020/21 can also claim for that year if they have not yet done so.

    Where an employee is required to complete a self-assessment tax return, the claim can be made on the return.

    A claim of £6 per week (£312 for the year) will save a basic rate taxpayer £62.40 in tax and a higher rate taxpayer £124.80 in tax.

  • Special reductions and late filing penalties

    The First-tier Tribunal (FTT) has considered whether a taxpayer had a reasonable excuse for filing his tax returns late. While the issue was not unusual, the FTT’s ruling was. How might its decision help you reduce a late filing penalty?

    Tough late filing penalties

    Several years ago HMRC vastly ramped up the penalties it can charge if you submit a tax return late. Oliver Hampel (H) felt the full force of this when HMRC charged penalties for two late tax returns that equated to between a fifth and one third of his annual income.

    The undisputed facts

    When H’s business income fell sharply he decided to ditch his accountant and complete his personal returns himself. Unfortunately, his inexperience resulted in his 2015/16 and 2016/17 returns being submitted late and so HMRC demanded penalties. He appealed against them to the First-tier Tribunal (FTT) on the grounds that he had a reasonable excuse for the lateness. If the FTT agreed the penalties would be cancelled.

    A reasonable excuse?

    H’s first excuse was that he had trouble logging on to HMRC’s self-assessment system. Anyone who’s used HMRC’s self-assessment filing system will sympathise with H, as did the FTT. However, this did not relieve H of his responsibility. It was his fault that he left submitting his tax return to the eleventh hour when it was too late to get help. H’s alternative argument was that he was not sure where to report his income: on his personal tax return or that for his company. This is also a lame-duck argument for the same reason as H’s other excuse. He couldn’t shirk his responsibility to file a tax return simply because he didn’t understand the tax rules. The FTT could not accept either of H’s arguments as reasonable excuses and therefore the penalties had to stand.

    Unreasonable penalties

    That might have been the end of the matter for H but the FTT wasn’t done, and this time it was HMRC that came under fire. The FTT decided that the amount of penalties compared to H’s income meant that HMRC should have considered a “special reduction”.

    The tax rules specifically allow for a special reduction of penalties in various circumstances.

    HMRC’s responsibility

    HMRC failed to take account of H’s low income following his appeal against the penalties. The judge said that it is “clearly possible for a penalty imposed for failure to make a return to be disproportionate when compared to the taxpayer’s income”. Therefore, while the fixed penalties are usually justifiable the variable and daily penalties introduced more recently can soon add up to a sum which is unreasonably high and disproportionate; this was the position in H’s case. As a result, the FTT ruled that the penalties should be reduced to the fixed amounts, which in this case were £100 for the 2015/16 return and £400 for 2016/17.

    The FTT did not accept that the taxpayer had a reasonable excuse for submitting his returns late and so confirmed that penalties were payable. However, it chose to substantially reduce them as the amounts were unreasonably high given the taxpayer’s income. HMRC should have considered this when the taxpayer made his appeal.

  • Take dividends while you can

    For personal and family companies, a tax efficient strategy for extracting profits is to take a small salary and to extract any further funds needed outside the company in the form of dividends. However, while there are no restrictions on taking a salary if the company is making a loss, the same is not true of dividends.

    Need for retained profits

    Dividends can only be paid out of retained profits (i.e. profits left in the business after corporation tax has been paid).

    However, if a company make a loss for a particular year, this does not necessarily preclude the payment of a dividend, as long as the company had retained profits at the start of the year, and the loss has not completely eliminated those profits.

    Example

    Andrew runs a personal company A Ltd. He prepares accounts to 31 July each year. At 1 August 2020, he had retained profits of £20,000. He expects to make a loss for the year to 31 July 2021 of £5,000. He will have retained profits available after taking account of the predicted loss of £15,000 from which to pay dividends.

    Plan ahead

    If a company needs funds outside the business and is unsure regards to future profitability, it may be worthwhile taking dividends while there are retained profits available.

    Using the figures in the above example, assuming that Andrew has cash available, he may wish to extract all his retained profits as a dividend while he can to benefit from the more favourable tax treatment of dividends. If he makes further losses, his remaining profits may be eliminated, removing the option of taking a dividend.

    The dividend will be tax-free to the extent to which it is covered by the dividend allowance (set at £2,000 for 2021/22) and any unused personal allowance. Thereafter, dividends (treated as the top slice of income) are taxed at 7.5% to the extent to which they fall in the basic rate band, at 32.5% to the extent to which they fall in the higher rate band and at 38.1% if they fall in the additional rate band. There is no National Insurance on dividends.

    It is prudent to prepare management accounts to show that the company had retained profits at the time at which the dividend was paid, in case of a challenge by HMRC.

    No retained profits

    In the absence of retained profits, it is not possible to pay a dividend; any payment made that is classed as a dividend, will be made illegally and may be challenged by HMRC and reclassified as a salary or bonus payment, and taxed accordingly.

    However, if the company is loss making, but funds are need to meet personal liabilities, it is possible to pay a higher salary or a bonus, even where this increases the amount of the loss. The salary or bonus payment, and any associated employer’s National Insurance, can be deducted in working out the taxable loss, which may be carried back to generate a repayment of corporation tax.

  • SEISS Action if claiming the 4th grant

    Action to take if eligible for the 4th SEISS grant Feb-Apr 2021

    Look out for communication from HMRC April 2021

    HMRC will be contacting you in mid-April to let you know if you are eligible to claim the 4th SEISS grant for the quarter ending 30 April 2021.

    This will be sent by letter, email or within HMRC’s online service and it will advise you of the earliest date you can make your claim.

    Before making your claim

    To make your claim you will need to gather together the following information:

    • Your self-assessment unique taxpayer reference (UTR)

    • National Insurance number

    • Government Gateway user ID and password

    • Your UK bank details including sort code, account number, name on the account and address linked to the account.

    You may also need to answer questions about your passport, driving license or other information held on your credit file.

    You may need to back up your claim

    You will need to keep evidence that your business has suffered reduced activity. For example, business accounts show reduced activity, records of cancelled contracts or appointments, record of any dates you suffered reduced activity due to lockdown or similar government restrictions.

    Additionally, you will need to keep details of the following:

    • A record of dates you had to close due to government restrictions

    • NHS Test and Trace instructions if self-isolating

    • NHS instruction to shield

    • Test results if diagnosed with coronavirus

    • Letters from school regarding closures that required you take on additional child care

    Making your claim

    You can only apply online, and the online service is timed to open from late April 2021. Your letter from HMRC will advise you of the earliest date you can apply.

    You must make the claim personally, we cannot do this for you.

    Once you have completed the claims process you should receive your grant within 6 days.

    We can help

    Although we cannot directly make claims for clients we can help if you are unsure if you should make a claim or you are having difficulty completing the online application process.

  • Taxing the SEISS - what’s the latest?

    HMRC has published new guidance which explains when you might need to amend your self-assessment tax return if you claimed Self-Employment Income Support Scheme (SEISS) payments.

    HMRC’s notice published on 2 July advises anyone who has claimed and received one or more coronavirus support payments under the Self-Employment Income Support Scheme (SEISS) to check their 2020/21 tax returns. The notice is part of HMRC’s clampdown on incorrect and false claims; it’s currently investigating around 12,000 such cases. However, the latest guidance is to ensure that the correct tax is paid on genuine claims.

    Disparities. The new guidance follows HMRC’s discovery that many of the self-assessment tax returns submitted for 2020/21 include entries which don’t match the figures it already has on record. Either SEISS payments haven’t been reported at all or the figures differ from those HMRC has on record.

    What to report. Payments from the first, second or third SEISS grants (received on or before 5 April 2021) should be included on your 2020/21 return in the “Self-Employment Income Support Scheme grant” box. If you haven’t yet submitted your tax return remember this.

    If you have submitted your 2020/21 return, check you’ve reported the SEISS payments in the right box. If you put them in the wrong place, you must send an amendment to your tax return otherwise HMRC will assume you haven’t reported the payments and will automatically amend your return. This will result in you being taxed twice on the same income.

    Mismatched figures. HMRC will also automatically amend your tax return if the amount of SEISS payments you reported doesn’t match its records. It will send you a revised tax calculation which you should check. HMRC explains how to do this in its latest guidance. It also explains what to do if you don’t agree with the amendment made by HMRC.

    Make sure you entered any SEISS payments in the right place. If you haven’t you must amend your tax return to show them correctly or you will be taxed twice.

  • Tax consequences of 'illegal' dividends

    Dividends can only be declared out of a company’s available undistributed profits, and if the payments are to be legal then the correct administrative procedures need to be followed. If a director sanctions illegal dividend payments, there can be significant tax for both the individual concerned and the company even if the director was unaware of the non validity of the dividend at the time.

    Just because the company's bank account is in credit does not necessarily mean that sufficient profit has been made to cover the dividend payment and it is the amount of 'retained profit' that needs to be calculated whenever declaring a dividend.

    ‘Retained profit’ is defined in the Companies Act 2006 as being ‘accumulated realised profits less ....accumulated, realised losses'. Therefore, a dividend can be paid in a loss-making period provided that there are sufficient 'distributable'/retained profits brought forward making an overall profit. Conversely a dividend cannot be paid if a profit had been made in an accounting period but retained losses brought forward mean that the overall result is a loss.

    Tax implications - Shareholder

    If a dividend is declared and there was insufficient retained profit at the time such that the dividend was 'illegal', then the dividend is treated as void and the shareholder is treated as not having received a distribution. Where the recipient shareholder knows or should have known that a dividend (or part thereof) is illegal, that shareholder is liable to repay the dividend (or the proportion that exceeds available reserves) to the company if it has already been distributed. It would be difficult for an active director/shareholder to state that he or she did not know that a dividend should not have been paid (this might not necessarily be the case if the director/shareholder was not that involved with the company). Indeed, HMRC's Corporation Taxes Manual at 5205 states that ‘when dealing with private companies controlled by directors who are shareholders, such a member [shareholder] ought to know the status of the dividend’.

    If the dividend is not repaid and the shareholder is also a director or employee of the company, the company will be deemed to have made a loan to the shareholder. As it is unlikely that interest would have been paid, this deemed loan will trigger a benefit-in-kind under the rules for taxable loans to employees; a notional interest rate being charged (currently 2.5% per annum), on which the employee will be taxable should the loan be more than £10,000 at any time in the tax year. P11D forms will need to be completed to account for the ‘beneficial interest’ on loans of more than £10,000. As with all P11D benefits, Class 1A National Insurance will need to be paid by the company on the benefit.

    Tax implications - Company

    HMRC would probably argue that the dividend represents a 'loan to a participator', on which the company is liable to a tax charge under CTA 2010 s 455. Such a charge arises when a company lends money to its directors or employees and the loan is not repaid within nine months and one day of the accounting year end.

    The rate of tax payable is the same as the higher 'dividend tax' rate of 32.5% on the gross amount paid. This amount is payable even if the company is making a loss and there is no corporation tax due but only if the loan is outstanding at the due date of corporation tax.

    To cancel this charge the loan needs to be repaid or written off by the due date of nine months and one day after the year-end. Once the loan is repaid or written off, the s455 tax will also be repaid nine months after the accounting end date in which the repayment is made; partial repayments attracting a pro rata refund.

    Non-tax consequences

    Showing illegal dividends in the company accounts can make the company look insolvent with negative balances on the balance sheet; this can affect the company’s ability to gain credit from a lender or suppliers and may breach current agreements - it may also provide HMRC with an excuse to start an enquiry.

  • Amend your PSA for Covid-19 related benefits

    A PAYE Settlement Agreement (PSA) enables an employer to meet the tax on certain benefits and expenses on the employee’s behalf. This can be useful to preserve the goodwill nature of a benefit.

    Not all benefits are suitable for inclusion within a PSA. To qualify a benefit must fall into one of the following categories:

    the benefit is minor;

    the benefit is provided irregularly; or

    the benefit is provided in circumstances where it is impractical to apply PAYE or to apportion the value of a shared benefit.

    A PSA can be used, for example, to meet the tax liability on the provision of an annual party that falls outside the associated tax exemption. Benefits that are exempt from tax do not need to be included.

    The tax and National Insurance payable on items included within a PSA for 2020/21 must be paid by 22 October 2021 where payment is made electronically, and by 19 October 2021 otherwise.

    An enduring agreement - Once as PSA has been set up, it remains in place until cancelled or amended by the employer or by HMRC. Existing PSAs should be reviewed each year to ensure that they remain valid.

    Amending the PSA

    If a PSA needs to be altered, this must be done by 6 July following the end of the tax year to which it relates.

    The Covid-19 pandemic changed the way in which employees worked and may have changed the mix of benefits that were provided. Where a PSA needs to be amended in light to take account of Coronavirus-related benefits provided in the 2020/21 tax year, this must be done by 6 July 2021.

    Normally, HMRC would issue a new P626 (the PSA) when a PSA is amended. However, where amendments to the PSA relate solely to Covid-19 changes, rather than issuing a new P626, they will instead issue an appendix to the existing PSA.

    Covid-19 exemptions - To remove the tax charge that would otherwise arise, a number of limited-time exemptions have been introduced in respect of Coronavirus-related benefits. These include an exemption for the provision of Coronavirus antigen tests, and also any reimbursement of the cost of the test where this is initially met by the employee.

    Where employees have worked at home during the Covid-19 pandemic and have bought equipment to enable them to do so, any reimbursement by the employer is also tax-free, as long as the provision would fall within the exemption for accommodation, services and supplies if provided directly by the employer.

    Coronavirus-related benefits that fall within the time-limited exemptions do not need to be included within a PSA. However, consideration may be given to adding any non-exempt benefits made available to employees during the pandemic to the PSA (for example, antibody tests), as long as they meet the qualifying conditions for inclusion.

    A new PSA - If a PSA is not already in place, should an employer wish to set one up to deal with taxable benefits provided as a result of the Covid-19 pandemic, if the PSA is to have effect for 2020/21, it must be agreed with HMRC by 6 July 2021.

  • SDLT Multiple Dwellings relief

    Multiple dwellings relief’ (MDR) allows a rate to be charged at the percentage payable on the ‘average value’ price (referred to as the ‘Average Value SDLT’ (AVSDLT)) should more than one property be purchased at one time, rather than on the total consideration. MDR is only available for residential transactions.

    The purpose of this relief is to simplify the calculation of SDLT when a single transaction includes the purchase of more than one dwelling. As such, rather than separately calculating the SDLT on each property acquired, SDLT is computed as follows:

    Calculate the ‘AVSDLT’ i.e. total dwellings consideration/ total number of dwellings.

    Multiply the resultant figure by the total number of dwellings.

    The answer is the total SDLT liability.

    NOTE 1: The SDLT must be at least equal to 1% x total dwellings consideration.

    NOTE 2: the dwellings are not the main residence of the purchaser and as such the additional rate of 3% applies.

    Basic example

    A single transaction (post 1 October 2021) comprises the purchase of 4 'dwellings' for £950,000.

    £950,000/4 = £237,500 per dwelling

    Tax per dwelling =

    3% x £125,000 = £3,750

    5% x £112,500 = £5,625

    £9,375 x 4 dwellings = £37,500

    The minimum tax is 1% of the purchase price = £9,500

    Tax payable without claiming MDR would be £67,250.

    Definition 1: 'Dwelling'

    Legislation does not define 'dwelling' but is widely accepted as being a building or part of a building that accommodates all of a person's basic domestic living needs. The definition has seen granny annexes, converted garages, pool houses, converted party barns and garden offices all qualify for the MDR relief.

    The nearest the legislation gets to providing a definition is FA 2003 sch 6B para which states that a dwelling is:

    ‘A building or part of a building counts as a dwelling if-

    It is used or suitable for use as a single dwelling, or

    It is in the process of being used constructed or adapted for such use.’

    One area where there have been several tax cases that have considered this definition centre round 'granny flats'. HMRC has confirmed that provided the granny flat is a self-contained dwelling and the main house comprises more than two thirds of the total, then MDR can be claimed. One of the main issues is where a property has an additional dwelling that cannot be accessed independently. For example, in a recent tax case relief was refused as there was no door separating the house from its annexe; it also did not have a separate postal address, council tax or utility supply.

    The relief does not apply to the transfer of a freehold reversion or head lease where a dwelling has a long lease of 21 years or more.

    Definition 2 - 'Single transaction'

    MDR can be claimed where the transaction involves an interest in at least two dwellings or at least two dwellings and some other property.

    Where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease then the SDLT rules treat those dwellings (for that transaction alone) as being non-residential property. This rule applies automatically. Therefore, depending on the figures, it might be better not to make an MDR claim. If one is made it is made on a land transaction return (due within 30 days of completion) or in an amendment to a return, the time limit for which is 12 months from the filing date

  • Extracting profits from a property company

    Running a property business through a limited company rather than as an unincorporated business may be an attractive proposition; at 19% the rate of corporation tax is lower than the basic rate of income tax and interest and financing costs are fully deductible in computing taxable profits. However, the tax bill on the company is not the end of the story – if profits are required outside the company, they will need to be extracted, and this may come at a further tax cost.

    Take a salary

    If your personal allowance has not been utilised elsewhere, it can be tax efficient to take a small salary. As long as the salary is at least equal to the lower earnings limit (set at £6,240 for 2021/22), paying a salary will ensure that the year is a qualifying year for state pension and contributory benefits purposes.

    The optimal salary will depend on whether the employment allowance is available to shelter employer’s National Insurance contributions. Where the allowance is not available, as will be the case if the company has one only one employee who is also a director, the optimal salary is equal to the primary threshold of £9,568. If the employment allowance is available, it is tax efficient to pay a higher salary equal to the personal allowance of £12,570.

    Declare dividends

    Once a salary at the optimal level has been paid, it is more tax efficient to take further profits as dividends, than to pay a higher salary. The dividends will be tax-free to the extent that they are covered by any unused personal allowance and the dividend allowance, which is set at £2,000 for 2021/22. Once the allowances have been used up, dividends are taxed at 7.5%, 32.5% and 38.1% where they fall, respectively, in the basic rate, higher rate and additional rate bands.

    There are some rules which govern the payment of dividends. They can only be paid out of retained profits (on which corporation tax has already been paid) and must be paid in accordance with shareholdings (although the use of an alphabet share structure allows for flexibility).

    Other options

    Other options for extracting profits from the property company include the provision of benefits in kind, which can be tax efficient where the benefit is exempt from tax and National Insurance, the payment of rent if the business is run from home and making pension contributions on the director’s behalf.

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Adrian Mooy & Co Ltd  -  61 Friar Gate  Derby  DE1 1DJ  -  adrian@adrianmooy.com

Adrian Mooy & Co - Accountants in Derby
61 Friar Gate Derby, Derbyshire DE1 1DJ
Phone: 01332 202660 Hours: Mon-Fri 9.00am - 5:00pm

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Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd.  Registered in England No. 05770414.

Registered to carry out audit work in the UK by The Association of Chartered Certified Accountants.

Details of audit registration can be viewed at www.auditregister.org.uk under number 8011438.

Registered office: 61 Friar Gate, Derby, Derbyshire, DE1 1DJ